How Donors Can Help Build Pro-poor Financial Systems

This paper presents a framework for action for donors to more effectively support pro-poor financial systems by mutual collaboration:

• Analyzing the priorities and constraints of financial system stakeholders from the perspective of expanding services to poor people;
• Identifying potential donor engagements with each stakeholder to create a menu of possible actions;
• Selecting an appropriate course of action from the menu.

The paper argues that financing through government budgets is not appropriate for building pro-poor financial systems. It presents an example of how few donor agencies joined forces to fund pro-poor finance in Tanzania through:

• Common donor goals;
• Supportive and appropriate government policy;
• Joint principles for pro-poor financial system development;
• Harmonization of donor procedures;
• Establishment of a trust mechanism.

Finally, the paper lists the emerging principles to improve effectiveness of donor support to pro-poor financial systems:

• Using donor to help build strong retail financial intermediaries that reach a large number of poor;
• Building local capacity and markets at macro, meso and micro levels;
• Avoiding the reinvention of the wheel if others have already analyzed the financial system;
• Donors not channeling financial services solely through governments but also utilizing private sector initiatives;
• Harmonizing standards and procedures to increase efficiency of all types of donor engagements;
• Using subsidies to make financial markets work for poor people and not to undermine them.